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Is Business Investment Falling Flat?

Robert Galbraith

By Michael Rainey

April 27, 2018

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The Census Bureau on Thursday issued what some saw as disappointing numbers for durable goods orders in March. While the topline results showed a 2.6 percent increase on a monthly basis, core capital goods orders – a measure that excludes defense and transportation orders and is often used as a proxy for business investment – fell by 0.1 percent compared to February.

The decline suggests that the tax cuts are not boosting capital expenditures by businesses in the way Republicans had hoped, at least not yet.

The drop inspired David Rosenberg, chief economist at Gluskin Sheff and a noted bear, to tweet, “Nice tax cut, shame about the capex. Core orders/shipments declined in March and atop downward revisions.”

Stephen Stanley, chief economist at Amherst Pierpont Securities, wrote in a note to clients, “I was especially disappointed by the core capital goods performance. This gauge has been essentially flat on balance since October. I still believe that a burst of investment activity is coming, but I am surprised that we have yet to see much momentum in the orders measure.”

A report from UBS on Thursday, however, told a different story about capital expenditures by U.S. businesses. Of the 130 companies in the S&P 500 that have issued earnings reports recently, capital spending has risen by 39 percent, the biggest jump since 2011. And that rate of the increase is larger than the rate for the big jump in buybacks and dividends, which rose by 16 percent and 11 percent respectively.

Bloomberg’s Lu Wang said the data provides a counterpoint to critics who said the tax cuts would end up in shareholders’ pockets rather than reinvested in their companies: “The data is a fresh rebuttal to those who warned that hundreds of billions of dollars of tax relief will head directly to the stock market and be harvested by shareholders already fattened by a nine-year bull market. While buybacks indeed got a boost from the windfall, companies increased the rate at which they unleash cash for building factories and upgrading equipment, a strategy that’s preferred by investors for the benefit of future growth.”